OVERALL STATS STATS BY MODULE. University of Financial Success. Report Date

OVERLL STTS Group Name University of Financial Success Report ate 22-ec-15 Number of Takers 33 Group verage 75% Group Median 78% Highest Score 95% Lowest Score 35% est Performing Question Equities 24 Worst Performing Question urrencies 27 STTS Y MOULE Group Name Group verage Group Median est Performing Question Worst Performing Question Economic Indicators urrencies Fixed Income Equities 72% 75% 73% 76% 68% 78% 76% 81% 3 1 24 24 5 27 18 12 1

SORES Y STUENT Name Score Score in Economic Indicators Score in urrencies Score in Fixed Income Score in Equities ourse ompletion ate Student 1 57 42 52 67 58 26-Oct-15 Student 2 85 79 78 85 93 27-Oct-15 Student 3 77 95 93 82 56 26-Oct-15 Student 4 80 89 78 61 93 24-Oct-15 Student 5 90 89 85 91 93 24-Oct-15 Student 6 76 58 74 67 93 28-Oct-15 Student 7 81 74 33 100 100 21-Oct-15 Student 8 40 68 33 39 33 22-Oct-15 Student 9 75 95 78 64 72 21-Oct-15 Student 10 45 47 48 45 42 23-Oct-15 Student 11 69 58 85 61 70 23-Oct-15 Student 12 57 53 56 64 53 23-Oct-15 Student 13 85 68 85 85 93 27-Oct-15 Student 14 87 100 81 100 74 28-Oct-15 Student 15 75 63 70 82 79 21-Oct-15 Student 16 95 95 89 97 98 24-Oct-15 Student 17 44 47 56 55 26 23-Oct-15 Student 18 67 58 59 73 70 21-Oct-15 Student 19 35 26 33 24 49 27-Oct-15 Student 20 78 58 89 100 63 21-Oct-15 Student 21 92 89 100 76 100 28-Oct-15 Student 22 85 95 93 91 72 27-Oct-15 Student 23 78 68 81 76 81 27-Oct-15 Student 24 75 68 100 27 98 22-Oct-15 Student 25 95 100 96 94 93 22-Oct-15 Student 26 91 89 85 97 91 24-Oct-15 Student 27 81 89 96 79 70 23-Oct-15 Student 28 76 53 100 55 88 27-Oct-15 Student 29 83 68 74 91 88 27-Oct-15 Student 30 87 95 89 82 86 25-Oct-15 Student 31 57 37 59 70 56 26-Oct-15 Student 32 68 95 74 28 84 28-Oct-15 Student 33 75 63 63 85 81 26-Oct-15 2

Economic Indicators THE PRIMY OF GP 1. How accurately do GP statistics portray the economy and why?. ccurately because they are official numbers reported by the government. Inaccurately because the scope of GP measurements can change [correct]. ccurately because they are quantitative not qualitative. Inaccurately because it is too complex to estimate Explanation: Governments from time to time change the scope of GP measurement, as we saw with Nigeria and Italy. Just because they are official and numerical does not mean that they are accurate! While undoubtedly complex, GP is estimatable. 3

Economic Indicators THE PRIMY OF GP 2. onsider the formula GP = + I + G + (X M). country is undergoing a boom in consumption of domestic and foreign luxury goods. In one year, the dollar growth in imports is greater than the dollar growth in domestic consumption. ssuming nothing else has changed, what happened to GP?. It went up.. It went down. [correct]. It stayed the same.. There is not enough information to tell. Explanation: s imports act as a drag on GP, the larger growth in imports offsets the growth in consumption, thereby causing GP to decline. 4

Economic Indicators THE PRIMY OF GP 3. Here is the most important economic data for ustralia and Sweden. Which economy did better year-over-year (YOY) in the fourth quarter of 2013 compared to the fourth quarter of 2012? Use the two charts to investigate. (Students can scroll through both charts.) 5

. ustralia. Sweden [correct]. They performed identically.. There is not enough information to tell. Explanation: While ustralia had higher nominal GP growth, investors like to strip out the effects of inflation when gauging economic health. They do this by looking at real GP growth. In this case, Sweden had higher real GP growth than ustralia. 6

Economic Indicators THE PRIMY OF GP 6% 15% 3% 76% 4. In the United States, why is there a strong correlation between unemployment and GP?. s the U.S. is a net exporter, exports go down when workers are unemployed. This is because there are fewer workers manufacturing products for the global markets.. s housing accounts for 40% of GP and as unemployed people tend to lose their homes, GP is depressed when unemployment rises.. In the U.S., government spending accounts for 18% of GP. When unemployment rises, governments spend more on unemployment benefits. Therefore, GP rises.. onsumer spending accounts for two-thirds of the U.S. economy. When the number of unemployed consumers rises, there is less consumer spending. [correct] Explanation: The fact that the United States is largely a consumer economy leads to the tight connection between U.S. unemployment and U.S. GP. The U.S. is a net importer, not a net exporter. Housing accounts for 40% of the inflation basket, not GP. Government benefit payments rise when unemployment rises. From an overall GP perspective, however, this is more than offset by declines in consumer spending. 7

Economic Indicators THE PRIMY OF GP 5. Here is a chart showing both nominal and real GP growth for a country. Which of the following can be a true statement?. The country has inflation. The bottom line is nominal growth and the top line is real growth.. The country has inflation. The top line is nominal growth and the bottom line is real growth.. The country has deflation. The top line is nominal growth and the bottom line is real growth.. The country has deflation. The bottom line is nominal growth and the top line is real growth. [correct] Explanation: In this chart for Switzerland, the yellow line is real GP growth. The white line is nominal GP growth. s nominal GP growth is below real GP growth at the far right-hand end of the chart, this denotes negative inflation, i.e. deflation. 8

Economic Indicators THE PRIMY OF GP 58% 12% 30% 0% 6. The white line denotes GP growth. Which of the following lines is the best leading economic indicator?. Green line [correct]. Yellow line. White line. Pink line Explanation: The green line denotes the PMI Index. In the great recession starting in late 2008, PMI fell to its low point and started to recover well in advance of GP falling to its low point. 9

Economic Indicators THE PRIMY OF GP 9% 3% 3% 85% 7. The misery index is often cited in the media as a way to measure consumer pain. It is defined as the inflation rate plus the unemployment rate. Review the chart and identify the country with the highest misery index.. Italy [correct]. United States. Sweden. Singapore Explanation: The misery index numbers are, in descending order, Italy 13.3%, Sweden 8.6%, United States 8.3%, Singapore 3.3%. 10

Economic Indicators THE PRIMY OF GP 15% 64% 18% 3% 8. What type of indicators are unemployment and business confidence?. Unemployment is leading and business confidence is coincident.. Unemployment is coincident and business confidence is leading. [correct]. Unemployment is lagging and business confidence is coincident.. Unemployment is coincident and business confidence is lagging. Explanation: s we saw, unemployment changes in line with GP because consumer spending accounts for the bulk of GP. usiness confidence is a leading indicator of GP because when businesses are confident, they invest more in the economy. 11

Economic Indicators MONITORING GP 15% 6% 3% 76% 9. Which of the following qualities of economic indicators do investors prize most?. Rigor. Sample size. Timeliness of release [correct]. Government sponsorship Explanation: "New news" makes markets move. ccordingly, the economic indicators that most quickly herald "new news" are of the most value to traders and investors. 12

Economic Indicators MONITORING GP 6% 15% 30% 48% 10. Why is the release of GP statistics less interesting to investors than other indicators?. ecause governments consistently alter their GP measurement methods. ecause the formula for GP includes not only private investment but also other irrelevant factors. ecause GP is not official government data. ecause GP statistics are released well after other economic indicators [correct] Explanation: GP statistics are typically released by the government a month or more after the period in question, by which time dozens of other indicators have been released. 13

Economic Indicators MONITORING GP 9% 9% 6% 76% 11. Which of the following important U.S. economic indicators is only available on a quarterly basis?. Nonfarm payrolls. PI. GP [correct]. PMI Explanation: PMI, PI, and nonfarm payrolls are published monthly. GP is only published on a quarterly basis. 14

Economic Indicators MONITORING GP 12% 12% 21% 55% 12. Which economic indicator is most directly linked to unemployment?. Nonfarm payrolls [correct]. PI. PMI. GP Explanation: Nonfarm payrolls is the unemployment report. PI is inflation, PMI is business confidence, and GP is growth. 15

Economic Indicators FORESTING GP 3% 9% 0% 88% 13. Here is the economic calendar for the United Kingdom for ugust 2013. Explore indicators like PMI, house prices, industrial production, employment, retail sales, and GP. How was performance overall? (Students can scroll through this calendar.) 16

. elow expectations. In line with expectations. bove expectations [correct]. There is not enough information to tell. Explanation: The United Kingdom surprised the world in the second half of 2013 with the robustness of its recovery. The PMI index (Markit UK PMI Manufacturing, row 21) for July registered 54.6 versus an estimate of 52.8. House prices (Nationwide House Px NS YoY, row 25) rose 3.9% YoY versus an estimate of 3.1%. Industrial production (Industrial Production YoY, row 34) grew 1.2% YoY versus an estimate of 0.8%. Jobless claims (Jobless laims hange, row 63) declined by 29,000 versus an estimated decline of only 15,000. Retail sales (Retail Sales Ex uto YoY, row 69) grew 3.1% versus an estimate of 2.7%. GP (GP YoY, row 82) for the second quarter grew 1.5% YoY versus an estimate of 1.4%. 17

Economic Indicators FORESTING GP 6% 9% 3% 82% 14. This chart was captured in mid-2014. t that point in time, which of the following terms would have described the growth predicted in this pop-out table?. cceleration. eceleration [correct]. Stagnation. Expansion Explanation: hina grew by 7.7% in 2013. t the time this screen was captured, it was expected to grow by only 7.25% in 2016, meaning that analysts expected hina to decelerate. 18

Economic Indicators FORESTING GP 9% 6% 12% 73% 15. How have economic forecasts for this country evolved?. Material improvement. Material deterioration. Minimal change [correct]. There is not enough information to tell. Explanation: The white line represents 2014 real GP growth forecasts. s the line is essentially horizontal, it means that the forecasts are mostly unchanged. 19

Economic Indicators FORESTING GP 9% 9% 12% 70% 16. These charts show data for four countries as of early 2016. For each country, the purple line denotes historic real GP growth. The white line denotes the consensus estimated real GP growth. The red line denotes the most pessimistic analyst forecast. The green line denotes the most optimistic analyst forecast. For which country is there the most controversy among the analyst community about 2016 growth? 20

. lbania. ominican Republic. Russia [correct]. Germany Explanation: The chart for Russia displays the widest spread between the analyst estimates. The difference between the lowest (red) and the highest (green) estimates is over 3 percentage points. Moreover, analysts predict a continuation of current trends for the other three countries. Meanwhile, analysts expect a reversal of recent growth trends for Russia. 21

Economic Indicators FORESTING GP 0% 15% 21% 64% 17. What is the main reason that investment banks create estimates of economic indicators?. To determine in which countries the banks should operate. To increase real GP growth by exporting their intellectual property to foreign investors. To hold governments accountable for management of their economies. To know when specific economic data points are a positive or negative surprise [correct] Explanation: Surprises move markets, and market movements are the lifeblood of investment banks. While a successful financial institution will benefit the GP of its host nation, and while the creation of economic estimates does help keep governments accountable, banks primarily exist to make money. 22

Economic Indicators FORESTING GP 15% 12% 12% 61% 18. Which of the following is the biggest pitfall of economic indicators?. They do not take into account seasonality.. They are not sufficiently timely to make investment decisions.. They only serve as proxies for economic activity.. They do not consistently presage turning points. [correct] Explanation: Investors analyze the economy through the lens of economic indicators primarily to make money and avoid losses. When economic indicators fail to predict a turning point, which they frequently do, investors can miss out on opportunities and/or lose money. Some economic indicators are very timely, such as PMI. ll economic indicators are proxies. 23

Economic Indicators FORESTING GP 6% 18% 12% 64% 19. Here is a chart displaying economic estimates of the initial jobless claims economic indicator, one of the main unemployment statistics in the U.S. It measures the number of new applicants for unemployment benefits. What was the level of the analyst with the most optimistic outlook?. 260 [correct]. 274. 277. 290 Explanation: The most optimistic analyst is the analyst expecting the lowest increase in initial jobless claims. In this case, the lowest estimate is 260. 24

urrencies URRENY MRKET MEHNIS 94% 6% 1. Of the visible countries, which is the fourth biggest exporter and fourth biggest importer?. Japan [correct]. Germany. United States. hina Explanation: Looking at the bar charts around the ring, the country with the fourth highest imports (the outwards facing bar) is Japan. nd the country with the fourth highest exports (the inwards facing bar) is also Japan. 25

urrencies URRENY MRKET MEHNIS 6% 18% 6% 70% 2. In 1994, the Mexican peso declined against the U.S. dollar by 37% during the so-called Tequila risis. Use the article to answer this question: What exacerbating factor did Mexico's Tequila risis have in common with the rgentine crisis of 2002? 26

. oth countries use the same currency: the peso.. oth countries had large dollar-denominated debts. [correct]. oth crises occurred in ecember, a holiday month.. oth crises happened in Latin merica. Explanation: The fourth paragraph of the article cites $5.2 billion of Mexican government debt coming due in the next five weeks. In 2002, rgentina had a total of $100 billion of debt. s we mentioned earlier, a decline in a currency's value versus the U.S. dollar will make U.S. dollar-denominated debt owed harder to repay. 27

urrencies URRENY MRKET MEHNIS 15% 9% 15% 61% 3. How many New Zealand dollars (NZ) can you buy with 100 ustralian dollars (U)?..92690. 1.0789. 92.690. 107.89 [correct] Explanation: It takes 0.92690 ustralian dollars, or U, to buy you 1 New Zealand dollar, or NZ. If you were therefore to convert 1 U to NZ, you would get slightly more than 1 NZ. To calculate how many NZ you would get for 100 U, take 100 and divide it by 0.92690. 100 U would therefore buy you 107.89 NZ. 28

urrencies URRENY MRKET MEHNIS 9% 12% 0% 79% 4. llison lives in merica and has just retired. It is early 2016. She has long had dreams of going to the top of the Eiffel Tower in France, visiting uckingham Palace in the United Kingdom, seeing the cherry blossoms in Japan, and cruising the fjords on the west coast of Norway. She last considered all four options on New Year's ay 2008. She would like to select the trip to go on based on which country's currency has subsequently weakened the most against the U.S. dollar. Where will she go on vacation? 29

. Norway [correct]. United Kingdom. Japan. France Explanation: The Norwegian krone chart is expressed in terms of the number of Norwegian krone per one U.S. dollar. The chart rises from approximately 5.5 to 8.4, representing a 50% strengthening of the U.S. dollar. The U.S. dollar strengthened less against the euro and sterling. The U.S. dollar was roughly unchanged against the Japanese yen. 30

urrencies URRENY MRKET MEHNIS 0% 6% 3% 91% 5. Review the four currency pair charts for the arbadian dollar against the Jamaican dollar, the zech koruna against the Polish zloty, the Nigerian naira against the Ghanaian cedi, and the Hong Kong dollar against the Macanese pataca. Which pair is pegged? 31

. The arbadian dollar against the Jamaican dollar. The zech koruna against the Polish zloty. The Nigerian naira against the Ghanaian cedi. The Hong Kong dollar against the Macanese pataca [correct] Explanation: The hallmark of a pegged currency pair is the absence of change in the currency pair value. The y-axis shows that the Hong Kong dollar barely moved against the pataca. Over the period, the naira had repeated pronounced spells of strengthening and weakening against the cedi. The same is true of the koruna and zloty. While the arbadian dollar and Jamaican dollar currency pair was relatively stable, the Jamaican dollar weakened by 5% over the period. 32

urrencies URRENY MRKET MEHNIS 12% 9% 9% 70% 6. Which of the following is NOT an example of a failed peg?. ritish sterling in 1992. Mexican peso in 1994. Hong Kong dollar in 1997 [correct]. rgentine peso in 2002 Explanation: We reviewed all four currency crises in this module. The ritish, Mexican, and rgentine crises all resulted in devaluations. Recall that onald Tsang successfully defended the Hong Kong dollar peg. 33

urrencies URRENY MRKET MEHNIS 6% 6% 18% 70% 7. Use the chart below to answer the question. How many anish crowns (KK) will buy 100 Japanese yen (JPY)?. 0.05360. 5.360 [correct]. 18.656. 1865.6 34

Explanation: If we look at the JPY row, we see that it takes 18.656 Japanese yen to buy 1 anish crown. Therefore, 100 Japanese yen will buy (100 / 18.656), or 5.360 anish crowns. We could also have arrived at the same answer by seeing that it takes 0.0536 anish crowns to buy 1 Japanese yen. Hence, (100 * 0.0536). 5.360 anish crowns would buy 100 Japanese yen. 35

urrencies URRENY VLUTION 6% 6% 18% 70% 8. ccording to this ig Mac index screen, which of the following countries' currency is the most undervalued?. United States. hina [correct]. razil. Thailand Explanation: n undervaluation is listed as a negative percent in the far right column. Of the four options, hina has the largest negative number. 36

urrencies URRENY VLUTION 9. What generally happens when a central bank unexpectedly increases interest rates?. The currency strengthens. [correct]. The currency weakens.. The currency strengthens, then weakens.. The currency weakens, then strengthens. Explanation: When a central bank increases interest rates, the government bond yields rise. This attracts investment from around the world, spurring demand for that country s currency. The currency, therefore, typically strengthens. 37

urrencies URRENY VLUTION 10. Which driver weakened the Swiss franc from one euro per Swiss franc to 0.83 euro per Swiss franc?. surprise change in inflation expectations [correct]. surprise change in valuation expectations. surprise change in interest rates expectations. surprise change in trade deficit expectations Explanation: When a central bank threatens to print a lot of money, the exchange rate will tend to depreciate. This is due to a surprise change in inflation expectations as printing money is inherently inflationary. 38

urrencies URRENY VLUTION 6% 0% 15% 79% 11. What does the ig Mac index show?. How the law of one price is true of consumer products. How currencies may be overvalued or undervalued [correct]. How interest rates and inflation affect trade. How The Economist magazine estimates inflation Explanation: The ig Mac index uses the prices of ig Macs around the world compared to the price of a ig Mac in the U.S. as a proxy for currency valuation. 39

urrencies URRENY VLUTION 12. What are the three main short-term drivers of currency valuation?. Surprise changes in interest rates, inflation, and gold. Surprise changes in interest rates, inflation, and trade [correct]. Surprise changes in unemployment, inflation, and trade. Surprise changes in unemployment, trade, and gold Explanation: When the government changes interest rates, this action changes the attractiveness of the bonds of that government. This typically leads to cross-border money flows either into or out of that country. Inflation erodes the purchasing power of a currency; therefore, it can have a powerful effect on currency valuation. ross-border trade directly influences currency transactions; therefore, changes in trade will alter the demand for a currency. Surprise changes in unemployment may lead to a shift in monetary policy. Unemployment is therefore important to currency valuation only insofar as it leads to surprise changes in interest rates. The gold standard no longer exists, meaning currencies are no longer pegged to gold. 40

urrencies URRENY VLUTION 18% 6% 6% 70% 13. y what mechanism do interest rates affect currency values?. Global investors are attracted by higher bond yields in high interest rate countries. [correct]. hanges in interest rates directly influence the value at which a currency is pegged.. High interest rates increase the value of house prices which make the currency safer.. Low interest rates always make a market more attractive for investors, which lifts the currency. Explanation: International investors frequently seek the countries with elevated government bond yields. When they buy these bonds, they must buy the domestic currency, which lifts the value of that currency. 41

urrencies URRENY VLUTION 9% 12% 9% 70% 14. Which of these headlines could move a currency pair?. U.S. Stocks Rally on Fed's Surprise Reduction of iscount Rate [correct]. Railroad Rate Hikes rive ichotomy of Necessary vs. Excessive. Hong Kong Firmly ommitted to ollar Peg, John Tsang Says. Grade Inflation: evaluing -Schools' urrency Explanation: Surprise changes in interest rates, inflation, and trade tend to move currency pairs. The only article on one of these topics concerns a surprise Fed change in the interest rate. 42

urrencies ENTRL NKS N URRENIES 9% 15% 3% 73% 15. What is the most common target inflation rate for an advanced economy?. 1%. 2% [correct]. 3%. 0% Explanation: The typical target inflation rate for a developed economy is about 2%. For example, the U.S., Japan, the U.K., and anada all target 2% inflation. 43

urrencies ENTRL NKS N URRENIES 9% 6% 9% 76% 16. What was the primary goal of benomics?. To reduce inflation by increasing unemployment. To help Shinzo be win the election of 2012. To halt the vicious cycle of deflation [correct]. To strengthen the yen to foster consumption of luxury goods Explanation: fter the Japanese stock market peaked in 1990, Japan entered a vicious deflationary cycle over the subsequent two decades. benomics was an attempt to break that cycle by weakening the yen to spur inflation and boost exports. 44

urrencies ENTRL NKS N URRENIES 3% 12% 9% 76% 17. Here is the vicious deflationary cycle. What step connects the lower left gray arrow to the upper right blue arrow?. Workers expect prices to increase. Workers demand pay increases. Employment declines. Prices decline [correct] Explanation: When fewer people work, consumer spending declines. This prompts companies to drop prices in order to stimulate demand. 45

urrencies ENTRL NKS N URRENIES 9% 0% 18% 73% 18. Was the Great epression in the U.S. linked to inflation or deflation?. Inflation. eflation [correct]. oth inflation and deflation. Neither inflation nor deflation Explanation: The Great epression of the 1930s followed the rampant consumption and speculation of the 1920s. usinesses and consumers were forced to pay off debt, which eroded spending in the economy. This led to price declines. 46

urrencies URRENY RISK 3% 6% 0% 91% 19. Why is there a mirror image between the yen weakness and stock market strength on the chart shown?. Rising Japanese interest rates both weaken the yen and lift the stock market.. declining yen will lift inflation, which is good for Japanese corporations.. Yen weakness favors the many exporting corporations within the index. [correct]. Stock market strength pushes Japanese investors to buy safe haven currencies. Explanation: weaker yen enables Japanese manufacturers to sell more units of their products to foreigners, driving the manufacturers' earnings. Rising Japanese interest rates would tend to strengthen the yen. orporations tend to dislike inflation. 47

urrencies URRENY RISK 9% 12% 9% 70% 20. In early 2016, the same Germany machinery company has interest from four prospective clients from emerging markets razil, Indonesia, Russia, and South frica. They all want to buy ten machines. The company will bill them in euros but the FO is worried that the client may cancel the order if his currency declines when the invoice comes due on June 30, 2016. ccording to historical currency volatility alone, the client from which country would be most likely to pay his invoice? 48

. Indonesia [correct]. razil. Russia. South frica Explanation: 15,212.11 Indonesian Rupiah buys 1 euro (middle of the range). The blue line on the right-hand side is at 16,511.40. If the currency moves one standard deviation, the shift would be as follows: (16,511.40 15,212.11) / 15,212.11 = 8.5%. This means that there is a reasonable chance that the Indonesia Rupiah may weaken by 8.5% over the coming months. similar analysis on the other three currency pairs shows that South frica, razil and Russia have 13%, 14% and 16% changes, respectively. The Indonesian Rupiah is therefore the least volatile against the euro. 49

urrencies URRENY RISK 15% 3% 0% 82% 21. What is the median estimate for the number of U.S. dollars per ritish sterling for calendar year 2015?. 1.61 [correct]. 1.63. 1.66. 1.75 Explanation: What is the median estimate for the number of U.S. dollars per ritish sterling for calendar year 2015? 50

urrencies URRENY RISK 6% 3% 3% 88% 22. What is the difference between itigroup and JPMorgan hase s estimate for the U.S. dollar/ritish sterling currency pair for the end of Q1 2015?. 0.16 pounds. 0.16 euros. 0.16 percent. 0.16 dollars [correct] Explanation: The difference between the two numbers (1.76 1.60) is 0.16. The question asks for the denomination. s it takes more than 1 dollar to buy 1 pound, we can deduce that the currency pair is being expressed in dollars per sterling. Therefore, the units are expressed in dollars. 51

urrencies URRENY RISK 23. You are a utch diamond dealer who sources diamonds from South frica. You believe that the frican continent is set to boom, and so you believe that the South frican rand will strengthen against the world s major currencies. Therefore, you are worried about your ability to afford South frican diamonds in the future. new mine is being dug in South frica and you have agreed with the miner to buy 1 million South frican rands' worth of diamonds a year from today. Therefore, you will need 1 million rands in cash in one year s time. urrently, the exchange rate is 17.1261 rands to the euro. You believe that the rand will strengthen to 16 rand to the euro in one year s time. You speak to some currency dealers and they let you know that they would agree today to convert your euros into rands in one year s time at the rate of 18.654182. ssume that you converted some of your euros into 1 million rands at today s prevailing rate and stored the rands in a safe. How many more or fewer euros would you have in one year s time if you were to agree today to the forward agreement instead of simply purchasing the million rands today? 52

. EUR 4,783 more [correct]. EUR 4,783 less. EUR 4,110 more. EUR 4,110 less Explanation: Today, 1,000,000 rands will cost you (1,000,000 / 17.1261) = EUR 58,390. If you take the forward agreement, 1,000,000 rands would cost you (1,000,000 / 18.654182) = EUR 53,607. Therefore, if you took the forward agreement instead of changing the money today, you would have (EUR 58,390 EUR 53,607) = EUR 4,783 more. 53

urrencies URRENY RISK 15% 9% 0% 76% 24. Why would Jack Welch suggest putting all company plants on barges?. To respond to the changes in the currency market quickly [correct]. To avoid using any domestic currencies. To locate the cost base in the most favorable tax regimes. To purchase materials for the plant more quickly Explanation: Jack Welch was referring to the problems that currency fluctuations inflict on global manufacturing corporations. Were all his plants to be on barges, he could move his manufacturing facilities away from countries with strong currencies to countries with weak currencies, thereby making the goods cheaper to buyers and so maximizing his profit. 54

urrencies URRENY RISK 6% 15% 15% 64% 25. Samsung is based in South Korea and reports in South Korean won. Samsung sells its products around the world and the geographic breakdown of its 2015 revenues are in the first chart. The second chart shows how some major world currencies moved against the South Korean won through the course of 2015. Of the currencies shown, which currency movement held back Samsung's revenue growth the most? 55

. Yuan. ollar. Real. Euro [correct] Explanation: Latin merica is not included in the revenue breakdown table therefore we can assume that the razilian real/south Korean won currency pair is irrelevant. Of the remaining three currency pairs, only the euro weakened against the South Korean won during 2015. This is apparent because the number of won to buy one euro went down. This movement would have partially held back Samsung's reported European revenue growth in terms of South Korean won. 56

urrencies URRENY RISK 3% 18% 3% 76% 26. Legendary investor Warren uffett said, Gold gets dug out of the ground... Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. nyone watching from Mars would be scratching their head. ased on this quotation, what quality of gold is he referring to?. Its durability. Its scarcity. Its physical attractiveness. Its storage costs [correct] Explanation: So-called gold bugs adore the durability, scarcity, and physical attractiveness of gold along with many other qualities of the metal. Warren uffet tends to invest in equities, especially into those paying a healthy dividend. Gold effectively pays a negative dividend as one has to pay people to guard it. uffett is here highlighting one of the least attractive features of gold as an investment. 57

urrencies URRENY RISK 27. Of the following options, what is the best way for investors to manage currency risk?. y locking in forward rates for known foreign payments [correct]. y investing in pegged currencies. y investing purely in very large stocks in their home market. y vacationing each year in a country with a weak currency Explanation: We reviewed how investors can lock future currency transactions. Pegged currencies have a dangerous habit of crashing. ig companies can operate in multiple countries. 58

Fixed Income THE ROOTS OF THE ON MRKET 9% 6% 6% 79% 1. What does it signify when the bars are green at the bottom?. eficit. High revenue. Growth. Surplus [correct] Explanation: When tax revenue (the white line) exceeds budgetary outlay (the orange line), the government is taking in more tax than it is spending, causing a budget surplus. The bottom chart shows the budget surplus (green) or deficit (red). 59

Fixed Income THE ROOTS OF THE ON MRKET 3% 3% 24% 67% 2. ccording to the table on the right, which country owns 2.9% of U.S. debt?. elgium [correct]. Taiwan. United Kingdom. Switzerland Explanation: This pie chart breaks down the $6T of U.S. debt held by foreign owners. Total U.S. debt is $12.5T, as we just learned. 2.9% of $12.5T is $362.The only country on the table with $362 of debt is elgium. 60

Fixed Income THE ROOTS OF THE ON MRKET 3% 3% 6% 85% 3. What quality of U.S. government bonds causes investors to buy them when market volatility rises?. U.S. government bonds are denominated in dollars.. U.S. government bonds are stored in bank vaults.. U.S. government bonds are unwritten by global taxpayers.. U.S. government bonds are considered low risk. [correct] 61

Explanation: U.S. government bonds are considered one of the world's main safe havens for investors because they are backed by U.S. taxpayers and the U.S. government ultimately could print money to repay them. The mere fact that an investment is denominated in dollars does not make it safe. 62

Fixed Income THE ROOTS OF THE ON MRKET 4. Why is fixed income called fixed income?. ecause bonds cannot rise in price over the life of a bond. ecause the repayment amounts and timings are fixed for ordinary bonds [correct]. ecause current and future owners of a bond get the same effective annual interest rate. ecause the price of the bond is fixed, given the safe haven nature of bonds Explanation: n ordinary bond has a rigid schedule of the repayment amounts and timings of those repayments. The price of the bond, however, is determined in the marketplace and can go both up and down. When a bond is bought at a new price, it leads the new owner to receive a different annual effective interest rate. 63

Fixed Income THE ROOTS OF THE ON MRKET 12% 24% 12% 52% 5. Which is the biggest??. World GP. World total stock market value. World total bond market value [correct]. World total currency reserves 64

Explanation: We saw earlier that world GP is $72T and that world currency reserves are $12T. We also saw that the bond market at $100T dwarfs the equities market which is a $64T market. Therefore, the bond market is the biggest of the four. 65

Fixed Income THE ROOTS OF THE ON MRKET 15% 67% 18% 0% 6. What is one reason why foreign governments lend to the U.S. government?. To enhance diplomatic relations. To build liquid FX reserves [correct]. To benefit from the price and yield going up. To pay for the U.S. budget deficit Explanation: Many countries feel the need to have large FX reserves and U.S. government bonds are suitably liquid for this purpose. Governments do not buy U.S. government bonds to enhance diplomatic relations. While foreign governments do, in effect, cover the U.S. budget deficit, they expect to get paid back with interest. ond prices move inversely to bond yields. 66

Fixed Income THE ROOTS OF THE ON MRKET 9% 18% 0% 73% 7. What does one yellow bar depict in this debt distribution diagram?. oupon repayment [correct]. Principal repayment. Yield repayment. istribution repayment Explanation: The yellow bars represent coupon repayments and the blue bar represents the single principal repayment at the end of the life of the bond. 67

Fixed Income THE ROOTS OF THE ON MRKET 15% 6% 9% 70% 8. Which one of the following actors benefits when interest rates go up?. company with a fixed-rate loan. company about to secure a fixed-rate loan. n investor who already owns bonds. n investor who is about to buy bonds [correct] 68

Explanation: When interest rates go up, bond yields go up, meaning bond prices go down. n investor who now buys bonds will benefit from lower-priced, higher-yielding bonds. borrower with a fixed-rate loan will be unaffected by interest rate movements as the interest rate is locked. company about to secure a loan will suffer from a higher interest rate on that loan. 69

Fixed Income ON VLUTION 9. When investors doubt the creditworthiness of a borrower, how do they alter their calculation of the bond yield to take into account these doubts?. Investors do not alter the calculation. [correct]. Investors exclude future repayments they think will not occur.. Investors add the percent likelihood of bankruptcy to the yield.. Investors decrease the price by the percent likelihood of bankruptcy. Explanation: They do not alter their calculation. s yield compares repayments to the price of a bond, and as the price will probably be very low, the yield will probably be very high. When calculating yield, investors never exclude future promised payments, no matter how unlikely they are to materialize. 70

Fixed Income ON VLUTION 10. s a general rule, what percentage of debt to GP will make a government s bond yields spike?. 50%. 90%. 150%. There is no general rule. [correct] Explanation: s a general rule, a higher debt burden will increase the risk of bonds. For higher risk, investors will demand a higher return in the form of an elevated yield. There is, however, no rule of thumb on when bond yields will spike. Japan is one of the most heavily indebted nations in the world, yet it has one of the lowest government bond yields. 71

Fixed Income ON VLUTION 0% 3% 12% 82% 11. What is true of both the U.K. and the U.S.?. oth countries print world reserve currencies.. oth countries are highly creditworthy. [correct]. oth currencies are used equally in the world FX markets.. oth are heavily reliant on long-term borrowing. 72

Explanation: The U.S. dollar is the world s reserve currency, which is involved in 85% of all currency trading. The bulk of U.K. government borrowing is long-term while the bulk of U.S. government borrowing is short-term. oth the U.S. and the U.K., however, have strong reputations for creditworthiness. 73

Fixed Income ON VLUTION 12. Which would you prefer?. 3% annual yield on an investment in 10-year U.S. government bonds. 4% annual yield on a risk-free 10-year government bond from the mythical country of Utopia [correct]. 2% annual yield on an investment in 10-year U.S. government bonds. 3% annual yield on a risk-free 10-year government bond from the mythical country of Utopia Explanation: oth U.S. government bonds and Utopian government bonds are risk-free. ll four should in theory offer the same reward: yield. If they do not, then the one offering the highest yield is in effect a free lunch. Opt for the bond with the highest yield. 74

Fixed Income ON VLUTION 13. Which would you prefer?. 5% annual yield on an investment in 10-year U.S. government bonds [correct]. 3% annual yield on a risk-free 10-year government bond from the mythical country of Utopia. 4% annual yield on an investment in 10-year U.S. government bonds. 2% annual yield on a risk-free 10-year government bond from the mythical country of Utopia Explanation: When the risk is the same, investors should prefer the bond with the higher yield. 75

Fixed Income ON VLUTION 3% 15% 9% 73% 14. What is the primary reason for U.S. government bond yields to ripple through the bond market?. ond prices move in lockstep in order for the yields to match government bond yields.. The large government bond market competes for investors attention via yields. [correct]. ll governments mandate interest rates as part of their economic policy.. Non-government borrowers are slightly less safe and therefore must offer slightly lower yields. 76

Explanation: ond yields move when bond prices move. s bond investors compare bonds based on their yields, and as government bonds are the largest part of the bond market, the yields on government bonds will compete for investors attention against the yields on all other bonds. 77

Fixed Income ON VLUTION 15% 9% 6% 70% 15. rise in which of the following measures would typically send a government bond price up?. reditworthiness [correct]. Inflation. Interest rates. Government borrowing Explanation: When investors become more comfortable that a borrower can repay, the risk and therefore the yield on the bond tend to go down, meaning that the price tends to go up. rise in inflation and interest rates typically sends yields up and prices down, as we saw. There is less of a connection between the level of government borrowing and the yield on a government bond. 78

Fixed Income ON VLUTION 9% 6% 21% 64% 16. Which of the countries shown makes the greatest relative use of short-term government financing? 79

. ustralia. Switzerland. Norway [correct]. Germany Explanation: Norwegian government debt will be completely paid off by 2026. ustralian government debt will be fully paid off by 2040, while both German and Swiss government debt will be fully paid off beyond 2046. 80

Fixed Income ON VLUTION 9% 9% 6% 76% 17. How do investors compare bonds?. y comparing the total amounts of principal and interest outstanding. y comparing the prices of single bonds. y comparing the total amounts borrowed to the repayment amounts. y comparing the yields [correct] Explanation: onds come in all shapes and sizes. The annual yield is derived from the amount still repayable and the bond price. oth are themselves inputs to the yield number. The resulting yield is the only number that facilitates apples-to-apples comparison. 81

Fixed Income ENTRL NKERS N INTEREST RTES 18. Which of the following is the strongest driver of inflation?. onsumers deferring purchases in hopes of a better deal. Wartime activities [correct]. rise in the price of gold. High interest rates Explanation: War fosters scarcity, which is inherently inflationary. onsumers deferring purchases is deflationary. Gold sometimes rises in response to inflation, but this rise in gold does not cause inflation. High interest rates are commonly used to combat high inflation. 82

Fixed Income ENTRL NKERS N INTEREST RTES 18% 3% 9% 70% 19. This chart shows the output gap in the U.S. as of the end of 1973. What was likely the Fed interest rate policy at the end of 1973?. To maintain high interest rates and be vigilant about inflation [correct]. To maintain low interest rates and be vigilant about inflation. To maintain high interest rates and be vigilant about deflation. To maintain low interest rates and be vigilant about deflation 83

Explanation: In 1973, as the U.S. actual GP (yellow line) was above potential GP (white line), there was a positive output gap and "the porridge was hot." Inflation had risen to over 8% and the Federal Reserve had hiked rates to 9%. The Fed was maintaining high interest rates and was fixated on inflation. 84

Fixed Income ENTRL NKERS N INTEREST RTES 6% 15% 15% 64% 20. Here is a chart from the ILE function displaying U.S. 10-year inflation expectations as of early 2016. t the point in time shown, where is the country's 10-year inflation expectation in relation to the entral ank's inflation target?. 1.5733% above. 0.5733% above. 0.4267% below [correct]. 1.4267% below Explanation: s we saw earlier, the inflation target for the U.S. is 2%. Therefore, the current inflation expectation of 1.5733% is 0.4267% below the target. 85

Fixed Income ENTRL NKERS N INTEREST RTES 15% 12% 9% 64% 21. Investors who fear rising inflation may buy Treasury Inflation Protected Securities (TIPS). How do TIPS shield lenders from inflation?. y disbursing gold bullion. y offsetting the inflation with deflation. y triggering an insurance payout. y compensating investors for inflation [correct] Explanation: TIPS compensate the lender in the event of inflation, using PI as a guide. 86

Fixed Income ENTRL NKERS N INTEREST RTES 12% 6% 18% 64% 22. What is the Federal Reserve's favorite inflation gauge?. ore PE [correct]. GP deflator. PI. Household income Explanation: ore personal consumption expenditure is the favorite inflation gauge of the Federal Reserve. The onsumer Price Index and the GP deflator are both affected by volatile food and energy prices and are therefore deemphasized. Household income is not in itself an inflation gauge. 87

Fixed Income ENTRL NKERS N INTEREST RTES 3% 3% 15% 79% 23. Here is the output gap in the U.S. in early 1975. What was likely the Fed interest rate policy?. To maintain high interest rates. To maintain low interest rates. To hike interest rates. To cut interest rates [correct] 88

Explanation: In 1975, U.S. actual GP (yellow line) was declining well below potential GP (white line), meaning there was a growing negative output gap. t the onset of this recession, the Federal Reserve was aggressively cutting interest rates, which had reduced from 9% in late 1974 to 5.5% at the time the chart shows. 89

Fixed Income THE YIEL URVE N WHY IT MTTERS 3% 0% 0% 97% 24. Why does the yield curve naturally slope upwards?. To offer investors increased bond prices over time as represented by the rising line. To compensate lenders for the greater risk of long-term loans compared to short-term loans [correct]. To pay investors for the risk of deflation. To attract bond traders who typically prefer long-term bonds Explanation: When you lend somebody money for a long period of time, there is a greater chance that the borrower will go bust or that inflation will rise as compared to lending money for a short period. Lenders therefore demand a greater return (that is, a higher bond yield) as compensation for the greater risk. This is why yields at the far right of the yield curve tend to be higher than yields at the far left to compensate for credit risk and inflation risk. 90

Fixed Income THE YIEL URVE N WHY IT MTTERS 0% 15% 9% 76% 25. Why did the corporate spread significantly widen during the 2008 market crash?. orporate bond issuers go bankrupt more frequently than governments, as they do not have a tax base to fall back on in hard times. [correct]. orporate bonds went up as investors rotated out of equities into all forms of safer bonds.. orporations were viewed as safer than governments; therefore, the corporate bonds went up and the government bonds went down.. slowdown in economic activity led to fears of rising inflation. 91

Explanation: In 2008, investors were worried about the recession sending companies into bankruptcy and the threat of deflation. This sent corporate bond prices down and so yields up. The same worries spurred investors to seek out investments with no credit risk, such as U.S. government bonds. This sent the price of such bonds up and so yields down. These two effects drove a sharp divergence between corporate and government bond yields. 92

Fixed Income THE YIEL URVE N WHY IT MTTERS 13% 0% 13% 75% 26. What impact will a tightening of the corporate spread most likely have on a company?. tendency to restrict the borrowing capacity of the company. tendency to expand the borrowing capacity of the company [correct]. tendency to make borrowing more expensive. tendency to make the company more prone to bankruptcy Explanation: tightening corporate spread is a vote of confidence in the company. It will make the cost of borrowing come closer to that of the risk-free borrowing of the government. This enhances the company s ability to borrow. 93

Fixed Income THE YIEL URVE N WHY IT MTTERS 6% 13% 16% 65% 27. The U.S. yield curve affects which of the following entities?. ll large companies worldwide and the U.S. government. ll large U.S. companies and all governments worldwide. ll large companies and all governments worldwide [correct]. ll large U.S. companies and the U.S. government Explanation: The U.S. yield curve represents the largest single part of the world bond market. It is priced in U.S. dollars, the main currency in the world, and is one of the most liquid parts of the world's financial markets. ccordingly, all other government bond markets around the world are viewed 94

relative to the U.S. government bond market. s interest rates affect economies, borrowing conditions, and company valuations, all companies and all governments worldwide are affected in some way by the U.S. yield curve. 95

Fixed Income THE YIEL URVE N WHY IT MTTERS 16% 13% 6% 65% 28. What is the 10-year to 3-month term premium of the following yield curve?. 2.421%. 0.023%. 2.398% [correct]. 2.332% Explanation: The table at the bottom of the chart provides the yield at various points in time along the yield curve. If we take the difference (the spread) between the 10Y yield of 2.421% and the 3Y yield of 0.023%, we get the 10Y-3Y term premium. 10Y yield 3M yield = 2.421% 0.023% = 2.398% 96

Fixed Income THE YIEL URVE N WHY IT MTTERS 10% 13% 16% 61% 29. Which of these purchases is most likely to be affected by interest rates?. safari. yacht. n automobile [correct]. n undergraduate university degree 97

Explanation: onsumers often borrow money to pay for a new car. The interest rate on the loan will be affected by prevailing interest rates. safari costs the least of the four items and is therefore more likely to be paid for out of savings. dditionally, banks are less willing to loan money for vacations as there is nothing to sell should the borrower go bankrupt. Yachts are typically purchased by the rich and super rich, who have less need to borrow money to make big purchases. Given that students tend to start undergraduate degrees at a certain stage of life, elevated interest rates will typically not deter students from attending a university at that time, although they may lead to greater interest in cheaper programs. 98

Fixed Income MOVEMENTS IN THE YIEL URVE 10% 13% 3% 74% 30. What is the primary driver of the left-hand end of the yield curve?. Inflation. entral bank interest rates [correct]. GP growth estimates. ond trading Explanation: The far left of the yield curve is linked to the overnight interest rate of the central bank. This means that it is closely linked to the central bank s base interest rate. 99

Fixed Income MOVEMENTS IN THE YIEL URVE 6% 10% 19% 65% 31. Which yield curve is most likely linked to a booming economy?.. [correct].. 100

Explanation: When the economy is booming, investors expect rates to go up in order to rein in inflation. The right-hand end of the yield curve will immediately reflect this with higher yields while the left-hand end will remain trapped in the present with the current lower level of rates. Therefore the yield curve will be steep. Looking at the y-axes of each chart reveals the yield curve with the highest 10-year to 2-year term premium. 101

Fixed Income MOVEMENTS IN THE YIEL URVE 13% 13% 10% 65% 32. The two yield curves in the chart are from September 10, 2001 (yellow line) and from October 10, 2001 (green line). What do you think the Federal Reserve did with interest rates in the month following the terrorist attacks of September 11, 2001?. Steepened the interest rates. Kept interest rates the same. Increased interest rates. ut interest rates [correct] 102

Explanation: In the month after the terrorist attacks of September 11, the Federal Reserve cut rates twice by 50 basis points in order to calm the financial markets. This explains why the left-hand end of the yield curve went down by a full percentage point over the month. 103

Fixed Income MOVEMENTS IN THE YIEL URVE 3% 10% 3% 84% 33. Why does the yield curve tend to invert shortly before a recession?. Recessions tend to send prices down and this includes the price of term premiums.. The fact that the yield curve inverted before many recessions in recent history is purely coincidental.. The term premium tends to be very positive before a recession due to impending interest rate hikes.. n inverted yield curve means that bond traders are predicting interest rate cuts, and interest rate cuts happen in response to a recession. [correct] 104

Explanation: The bond market is the largest market in the world. s the bond market is the forum where investors place bets on the future direction of interest rates, bond investors fixate on the central bank to guess its next move. Large institutional money managers devote heavy resources to this guessing game. The yield curve can therefore be thought of as the wisdom of the crowd. 105

Equities INTROUING THE STOK MRKET 3% 6% 3% 88% 1. Why do companies do IPOs?. When companies go bankrupt, they must delist.. ompany management gets to ring the bell on the stock exchange floor.. ompanies with revenue above a certain threshold must be publicly listed by law.. IPOs incentivize entrepreneurs to innovate as it provides a way for them to monetize their work. [correct] Explanation: IPOs are a way for entrepreneurs to monetize their investment and hard work. This incentivizes entrepreneurialism. elisting is the opposite of doing an IPO. There is revenue threshold above which a company must do an IPO. 106

Equities INTROUING THE STOK MRKET 6% 6% 27% 61% 2. Why do company manager-owners smile when they ring the stock exchange bell at their IPO?. Manager-owners receive their first stake in the company at an IPO.. Money raised from an IPO solely compensates manager-owners.. Manager-owners are freed of the burden of managing their company.. n IPO crystallizes the value of the manager-owners' stake. [correct] Explanation: n IPO puts a dollar value on the manager-owners' stake, demonstrating what their hard work and investment is worth. manager-owner may be selling a stake in the company at the IPO, but not necessarily. Equally, the company may just be raising funds for expansion. It would be profoundly odd for a manager-owner to ring the bell on his or her last day as the company would be losing a leader at the time when the ownership is changing. 107

Equities INTROUING THE STOK MRKET 6% 70% 21% 3% 3. Here are 22 of the 30 members of the ow Jones Industrial verage Index as of late March 2015. If all the shares went up by 5%, which share on the screen shown would have the biggest contribution to an upward movement in the Index?. General Electric. Goldman Sachs [correct]. pple. Exxon Mobil 108

Explanation: The ow Jones Industrial verage Index has an unusual weighting methodology. Unlike the S&P 500, it is weighted by share price, not by market cap. The company with the highest share price shown on this screen is Goldman Sachs. pple has the highest market cap on this screen $742. pple s share price is far lower than that of Goldman Sachs, however. 109

Equities INTROUING THE STOK MRKET 0% 9% 15% 76% 4. In 1999, James Glassman and Kevin Hassett published a book called ow 36,000. t the time, the ow Jones Industrial verage Index was just under 12,000. Which of the following is a potential substitute for the book title?. "The Total Market ap of the Stock Market Will Go own 36,000 Points". "The verage Retirement ccount of an Industrial Worker Will Triple". "The Sum of the Market aps of ll 30 ow Jones Members Will Triple". "The Sum of the Share Prices of ll 30 ow Jones Members Will Triple" [correct] Explanation: The ow Jones Industrial verage index is calculated by adding together the share prices of the 30 constituent companies. 110

Equities INTROUING THE STOK MRKET 5. Here is a chart of the index value for the S&P 500 and the United Kingdom s main equity index, the FTSE 100, from the end of 2008 to early 2015. One has clearly outperformed the other. Over this period, there was a technology boom and an oil crash. Here are pie charts showing the early 2015 index compositions by industry for both the S&P 500 and the FTSE 100. Which index outperformed? Index Values for S&P 500 and FTSE 100 111

S&P 500 Index ompositions FTSE 100 Index ompositions. The S&P 500 Index [correct]. The FTSE 100 Index. The U.K. Index. The WEI Index Explanation: s of early 2015, energy stocks accounted for about 14% of the FTSE 100 but only 8% of the S&P 500. Technology stocks accounted for only 4% of the FTSE 100 but 20% of the S&P 500. Therefore the technology boom was a tailwind for the S&P 500 while the oil crash was a headwind for the FTSE 100. The S&P 500 therefore outperformed the FTSE 100. 112

Equities THE NTURE OF EQUITIES 6. What is the prime reason that Jenny's discretionary income is more volatile than her salary?. Her tax rate remains 30%.. Her mortgage payments and necessities are fixed. [correct]. Her discretionary income and salary are equally volatile.. Her cost of living is affected by high inflation in the neighborhood. 113

Explanation: When Jenny's salary changes but her mortgage payment and necessities do not, the part of her income that is left over will change by a greater percentage simply because it is a lower number to begin with. The fact that the tax rate remains the same means that tax actually dampens the volatility of her discretionary income because the greater her salary, the greater her offsetting tax bill. Inflation affects her purchasing power and may affect her pay rises, but not the breakdown of the budget itself. 114

Equities THE NTURE OF EQUITIES 7. wedding planning company has a high fixed-cost base and a lot of debt. Who would you rather be?. shareholder in a booming economy [correct]. shareholder in a stagnant economy. bond holder in a booming economy. bond holder in a stagnant economy Explanation: high fixed-cost base and a lot of debt will have the effect of magnifying company earnings growth. Therefore, in a booming economy, it is nice to be a shareholder of such a company. In a stagnant economy, revenue tends to be stagnant, meaning there is nothing to magnify. ond holder returns are limited by the fixed nature of the repayments, meaning that bond holders do not participate in the upside from a booming economy. 115

Equities THE NTURE OF EQUITIES 3% 12% 0% 85% 8. The S&P 500 stood at 1848 at the end of 2013. ccording to the chart, what would the approximate return be on the S&P 500 from the trough of March of 2009 to the end of 2013, ignoring dividends?. 170% [correct]. 100%. 270%. 200% Explanation: t the trough in 2009, the S&P 500 stood at approximately 680. The level at the end of 2013 was 1848. 1,848 680 = 1,168. 1,168 / 680 = 172%. 116

Equities THE NTURE OF EQUITIES 9% 73% 18% 0% 9. The brown line stood at 2639 at the end of 2013. ccording to the chart, what would the approximate return be on the S&P 500 including dividends from the trough level in March 2009 of 945 to the end of 2013?. 217%. 179% [correct]. 317%. 279% Explanation: t the trough in 2009, the brown line which denotes the S&P 500 with dividends reinvested stood at 945. The level at the end of 2013 was 2639. 2639 945 = 1,694. 1,694 / 945 = 179%. 117

Equities THE NTURE OF EQUITIES 10. Why are equities volatile?. ue to the varying supply of and demand for IPOs. ue to the residual nature of earnings [correct]. ue to changing tax rates. ue to low levels of borrowing Explanation: Shareholder dividends are paid out from earnings. Fluctuations in both revenue and costs lead to fluctuations in what is left to pay shareholder dividends, that is, earnings. It is high levels of borrowing which do, in fact, make equities more volatile. 118

Equities THE NTURE OF EQUITIES 3% 12% 15% 70% 11. Which of the following statements is true?. When you buy an equity, your potential loss is unlimited and your maximum potential gain is 100%.. When you buy an equity, the most you can lose is 100% and your potential gain is unlimited. [correct]. When you buy an equity, you are promised a stream of fixed dividends.. When you buy a bond, you are promised the residual income of that company. Explanation: If a company in which you own shares goes bankrupt, your share certificates are worthless, meaning you lost 100%. If, on the other hand, you own shares in a company which went on to succeed spectacularly, the earnings and, therefore, the share price may multiply. 119

ividends by their nature are decided periodically and are not promised by company management. typical bond promises a series of fixed repayments, as opposed to a portion of the residual income of that company. 120

Equities THE NTURE OF EQUITIES 0% 9% 15% 76% 12. In the example highlighting the differences between bond holders and shareholders, surgeon Jenny is the shareholder. Which row of the budget planning table shows the amount to which she as a shareholder is entitled?.... [correct] Explanation: Shareholders are entitled to whatever is left after all other stakeholder claims are satisfied, along with all other fixed costs. In this example, the mortgage is owed to the bank, tax is owed to the government, and necessities are an unavoidable fixed cost. 121

Equities THE NTURE OF EQUITIES 9% 18% 15% 58% 13. You buy the stock of four consumer goods companies at the end of 2004 and hold them until ugust 2010. Here are the TR (Total Return) charts from loomberg for all four stocks. The "uy Price" in the top left-hand corner is the price you paid for each stock. The price of the stock in ugust 2010 is noted in the chart's legend. The legend also states the ividend djusted Value of the stock in 2010, the value of the reinvested dividends over the holding period. For which stock did the bulk of the total return come from dividends? 122

. olgate-palmolive. Procter & Gamble [correct]. Reckitt enckiser. hurch & wight Explanation: You bought Procter & Gamble for 55.08 at the end of 2004. You sold it for 60.19 in ugust 2010. The legend tells you that dividends over that period meant that the total you came away with was 69.17. Your total return, therefore, was 69.17 55.08 = 14.09. ividends contributed 69.17 60.19 = 8.98. Therefore, dividends contributed 8.98 / 14.09 = 64% of the total return, far exceeding the same portion for the other three stocks. 123

Equities EQUITY RESERH 14. What does the release of earnings announcements have in common with the release of economic indicators?. oth are typically released on a quarterly basis.. oth are typically published by corporations.. oth are estimated in advance by analysts. [correct]. oth are of broad interest to all investors. Explanation: We saw in the Economic Indicators module that analysts predict the direction of economy. Similarly, stock analysts predict the financial results of companies. Earnings announcements are typically quarterly while many economic indicators are released more frequently. Many economic indicators are published by government agencies. s economic indicators provide insights into the direction of the economy and interest rates, the most important such indicators are of interest to all investors. onversely, equity earnings estimates are mostly of interest to existing shareholders of that company. 124

Equities EQUITY RESERH 15. The number at the bottom right of each supplier's box shows the portion of oeing's total costs in the last year which go to that supplier. The number at the bottom right of each customer's box shows the portion of the customer's capital expenditure (money spent on high value purchases) in the last year which goes to oeing. For which company shown was oeing the primary plane supplier in the last year?. United ontinental [correct]. United Technologies. Honeywell International. hina Eastern irlines Explanation: oeing is only a supplier to companies on the right-hand side. 61% of United ontinental's capital expenditure went to oeing, compared to only 16% of hina Eastern irlines's capital expenditure. 125

Equities EQUITY RESERH 6% 9% 3% 82% 16. Which company is most exposed to the ups and downs of the aircraft engine industry?. Rolls-Royce. General Electric. United Tech orp. MTU ero Engines [correct] Explanation: ccording to the table in the lower right-hand corner of this screen, MTU ero Engines gets 100% of its revenue from the aircraft engine industry and thus would be most susceptible to changes in it. 126

Equities EQUITY RESERH 12% 3% 0% 85% 17. Engines are the most expensive, heavy component on an aircraft and are designed with detailed specifications. Which of the following would likely be the best theme for a Rolls-Royce analyst research note to help a portfolio manager decide between investing in Rolls-Royce or United Technologies?. The impact of the price of oil on air travel. Regulatory concerns for the oeing-irbus duopoly. The competitive environment in the super-luxury car segment. comparison of the commercial prospects of new aircraft models [correct] Explanation: The commercial success of engines is dependent upon the commercial success of the aircraft models that they serve. Neither Rolls-Royce nor United Technologies operates in the superluxury car segment. If there were to be anti-trust concerns about the oeing-irbus duopoly, or if the price of oil were to go up steeply, these factors would probably affect both players roughly equally. 127

Equities EQUITY RESERH 18. You are building a financial model of a bifocal lens manufacturer. Which of the following is the best driver to use?. Median age of society [correct]. Mean museum visits per capita per year. Mean cruise sales per household per year. Total number of bridge and mahjong players Explanation: The deterioration of vision increases with age. Therefore, the causal intuitive driver of a bifocal lens manufacturer is the median age of society. The other three metrics correlate with age but do not drive demand themselves for bifocal lenses. 128

Equities EQUITY RESERH 9% 12% 0% 79% 19. Here is a table from the loomberg Intelligence aluminum dashboard which shows the different end-uses of aluminum in hina. Which of the following loomberg headlines would be of most interest to an aluminum trader in hina? 129

. Next-Generation Vehicles to Show Shift From Steel to luminum. hina's luminum emand Weathers Real-Estate Slowdown So Far [correct]. oca-ola nnounces Plans to Recycle, Reuse ans Sold in U.S.. luminum Falls on oeing's nnouncement of Production uts Explanation: 33% of hina s aluminum goes towards the construction of buildings. This is the biggest use case followed by transportation (cars and plans), electric power, machinery, durable consumer goods, and packaging. Therefore, the story on the use of aluminum in the construction process should be of most interest. 130

Equities EQUITY RESERH 6% 9% 18% 67% 20. When an analyst is looking at a company for the first time, which of the following four activities does he do first?. efine the industry or industries in which the company operates [correct]. Size the market or markets in which the company sells. alculate the company's market share or shares. Estimate the breakdown of the company's cost base Explanation: The industry backdrop is foundational to equity research. Only once the analyst has accurately defined the industry can he size the market and calculate market shares. ost is typically modeled after revenues are modeled. 131

Equities EQUITY RESERH 12% 12% 3% 73% 21. Here is a table from the loomberg Intelligence copper dashboard which shows the different endusers of the red metal. Which of the following loomberg headlines would likely be of most interest to a copper trader?. opper Slides 7.7% to Seven-Month Low on U.S. onstruction ata. hina's onstruction Slowdown ents opper onsumption, Prices [correct]. Infrastructure Spending to Lead sia s Economic Growth. European industrial orders rose in May on Machinery, Tranport 132

Explanation: uilding construction and equipment are the two biggest consumers of copper ahead of infrastructure and industrial uses. Geographically, sia accounts for 60% of global demand. Therefore, the story about hinese construction should be of the most interest. 133

Equities EQUITY RESERH 12% 9% 9% 70% 22. Here is a breakdown of post-it note inventor 3M's revenue by industry. Which of the following industry drivers should be of most interest to a prospective investor of 3M?. The move towards the paperless office. The change in postal volumes [correct]. The prevalence of surgical procedures. The popularity of home improvement projects Explanation: The biggest revenue contributor to 3M is ontainers & Packaging, contributing one-third of the company's revenue. Postal volumes should therefore be of great interest to 3M investors. 134

Equities EQUITY RESERH 3% 3% 24% 70% 23. ompany X was expected to have earnings per share of $0.52 for the upcoming quarter. On the day of the results, the company reported earnings per share of $0.83. What happened to the share price when the stock market opened?. It went up.. It went down.. There is not enough information to tell. [correct]. It remained unchanged. Explanation: There is not a consistent relationship between a positive earnings surprise and the stock going up. When a surprise is positive, the shares go up more often than not, but not always. 135

Equities SOLUTE VLUTION 24. Which company is worth more, oca-ola or Pepsi?. oca-ola because it has a higher market capitalization [correct]. Pepsi because it has a higher market capitalization. oca-ola because it has a higher price per share. Pepsi because it has a higher price per share 136

Explanation: oke shares are worth $43. oke has 4,400M shares outstanding. Therefore, oke's market cap is $43 4,400M = $190. Pepsi shares are worth $98. Pepsi has 1,500M shares outstanding. Therefore, Pepsi's market cap is $98 1,500M = $147. s oke has a higher market cap than Pepsi, oke is worth more. oke, therefore, is akin to a larger loaf of bread than Pepsi, albeit with many more, far thinner slices. 137

Equities SOLUTE VLUTION 25. Widget o has a market capitalization of $100M. It does a 10-for-1 stock split. It then does a 1- for-16 reverse stock split. Finally, it does a 35-for-1 stock split. Nothing else changes. What s the new market cap?. $4.57M. $100M [correct]. $2,186M. $1.8M Explanation: Stock splits and reverse stock splits have no impact on equity valuation, so the market cap stays the same. 138

Equities SOLUTE VLUTION 26. What input do both absolute valuation and relative valuation require?. Long-term forecasts. Short-term forecasts [correct]. Historic revenue data. Historic earnings data Explanation: bsolute valuation demands both short- and long-term financial forecasts while relative valuation only demands short-term forecasts. Relative valuation does not necessarily require any historic financial data. 139

Equities SOLUTE VLUTION 27. Which of the following is most likely to be the most challenging part of this first step of the absolute valuation process?. Making the assumptions upon which to project future performance [correct]. onducting the necessary mathematics. Locating the required historic data within company releases and earnings statements. ividing the market cap by the number of shares Explanation: Mathematics and data collection are far less challenging than futurology. eriving estimated fair share price from the market cap and number of shares is the fifth and final step of the absolute valuation process. 140

Equities SOLUTE VLUTION 28. What is a reason one discounts future cashflows as part of the absolute valuation process?. Future profits are uncertain. [correct]. eflation makes future cashflows worthless.. The company might do a share split which will diminish the value of your stake.. Investors prefer future payments to payments today. Explanation: Equity investors expect T LEST the U.S. government bond yield, ideally a lot more, to compensate them for the uncertainty of the future profitability of the company in question. The number of shares has no bearing on a company's market cap. 141

Equities SOLUTE VLUTION 29. What role does beta play in absolute valuation?. It determines how risky a stock is in comparison to the overall stock market. [correct]. It sets the 10-year bond yield as a baseline required rate of return.. It provides the expected slope of the share price chart into the future.. It sets the return on a stock market index as a baseline required rate of return. Explanation: eta is a measure of company-specific risk, which is used as an input to the calculation of the company s weighted average cost of capital. eta was introduced into the calculation at step d, whereas the 10-year bond yield was set as a baseline requirement in step f, and the stock market return was an input (and not a requirement) in step c. 142

Equities SOLUTE VLUTION 30. What part of the $42.03 share price (to the nearest dollar) is represented by cash?. $11 [correct]. $9. $10. $8 Explanation: The shareholders are entitled to the cash on the balance sheet. Microsoft has $90 in cash and a market cap of $345. Therefore, $90 / $345 = 26% of the share price is represented by cash. The share price is $42.03; therefore, 26% $42.03 = $10.96 represents cash. 143

Equities SOLUTE VLUTION 31. How is enterprise value calculated?. Enterprise value = market cap cash + debt [correct]. Enterprise value = market cap + cash debt. Enterprise value = market cap + cash + debt. Enterprise value = market cap cash debt Explanation: Enterprise value is total firm value which is divided up between shareholders and bond holders. Therefore, it consists of a total equity value (market cap) and the net indebtedness of the firm (total debt cash). 144

Equities SOLUTE VLUTION 24% 15% 9% 52% 32. Which of the following stocks is most sensitive to the movement of the overall stock market?. Home epot. Intel. Starbucks. mazon [correct] 145

Explanation: eta is a measure of sensitivity of a stock to the overall stock market. The beta for a stock is listed at the top of the table on the right-hand side of the loomberg ET function. mazon has the highest beta and is therefore the most sensitive to the market of all the stocks shown. 146

Equities SOLUTE VLUTION 6% 18% 21% 55% 33. Which of the following ascribes the same relative weightings to short-term and long-term outcomes as the absolute valuation process?. student deciding to attend medical school. yoga instructor avoiding junk food. government giving a tax break on electric car purchases. fishery exceeding fishing quotas [correct] Explanation: The absolute valuation process ascribes a greater value to the short term than the long term. Medical school students, health fanatics, and government sponsorship of electric cars all represent a sacrifice today for a benefit tomorrow. This is the opposite of the absolute valuation 147

weightings. When a fishery cheats on fishing quotas, it imperils the long-term fishing stock while benefiting the fishery today. This ascribes a similar relative weighting to the short-term and long-term as the absolute valuation process. 148

Equities SOLUTE VLUTION 9% 15% 6% 70% 34. Here is the W function for U.S. drug company Pfizer. The W calculation has been hidden. What is the W?. 9.4%. 8.2% [correct]. 84.6%. 2.8% 149

Explanation: 84.6% equity mix 9.4% cost of equity = 7.95% contribution from equity. 15.4% debt mix 1.6% cost of debt = 0.25% contribution from debt. W = 7.95% + 0.25% = 8.2%. 150

Equities SOLUTE VLUTION 0% 12% 15% 73% 35. rise in which of the following inputs will increase an absolute valuation?. Number of shares. eta. Earnings estimates [correct]. 10-year government bond yield Explanation: The higher the earnings estimate, the greater the appraised value within an absolute valuation. Using a higher beta or a higher 10-year government bond yield will reduce the appraised value. Number of shares has no effect on appraised equity value, although it will reduce the appraised equity value per share. 151

Equities RELTIVE VLUTION 9% 6% 6% 79% 36. How do earnings yields differ from bond yields?. The earnings yield from equities is expressed as a percentage while the yields on bonds are expressed as absolute values.. The earnings from equities are paid out in non-cash dividends while the coupons on bonds are paid out in cash.. The earnings yields from equities are always higher than the yields on bonds due to the riskier nature of equities.. The cashflow from equities can continue forever while the cashflow from most bonds comes to an end. [correct] Explanation: ompanies can in theory live on in perpetuity whereas the vast majority of bonds expire. oth earnings yields and bond yields are expressed as a percentage. Most equity dividends are paid in cash. The yield on either a bond or an equity is partially derived from the price of the bond and the equity. s bonds and equities change hands for whatever price people agree to buy and sell them for, there is no cast iron law that earnings yields are always higher than bond yields. 152

Equities RELTIVE VLUTION 6% 0% 21% 73% 37. t its peak at the end of 1999, Microsoft had a market cap of $600. It was the pple of its day as P sales were booming and most ran Microsoft software. Revenue was growing 30% per year. The P/E ratio peaked at 70.0x. Looking at this chart, what happened in the subsequent 15 years?. Earnings declined and this pushed the market cap down.. Earnings grew and this pushed the market cap up.. The decline in the P/E ratio canceled out the decline in earnings and this pushed the market cap up.. The decline in the P/E ratio more than offset earnings growth and this pushed the market cap down. [correct] 153

Explanation: Earnings at Microsoft continued to grow from 1999 to 2014, leaping from $8 to $22. P/E, however, came down from over 70.0x to 16.0x. This meant that the market cap came down from over $600 to just over $300. The P/E ratio therefore drifted downwards and this more than offset earnings growth, meaning that the shares went down. Multiple compressions eclipsed the earnings growth. 154

Equities RELTIVE VLUTION 38. What is one possible weakness of this peer approach to valuation?. It is a very laborious approach to valuation.. The estimated growth can be dramatically wrong. [correct]. It only focuses on the statistics of one company.. It does not account for industry context. Explanation: Prospective P/E multiples are calculated using future earnings. s such, they can be dramatically wrong as they were in this case when hipotle was struck with an E. coli outbreak in 2015. Relative valuation is quick and easy. It compares peers in the same industry. 155

Equities RELTIVE VLUTION 6% 12% 0% 82% 39. Let s compare Mconald s to the market. Here we can see that the S&P 500 s P/E ratio is 18.5x. Mconald s has a price to earnings ratio of 19.3x, meaning that it trades roughly in line with the U.S. market. Investors will look at how the P/E of the company has trended in comparison to the P/E of the market. ny material deviation may pique investors interest. Here we can see that since the late 1980s, the P/E of Mconald s has moved loosely in line with the P/E of the market. 156

What may be a problem of comparing the P/E of a stock to the P/E of the overall market?. The overall market may not be sufficiently broad for the purpose of comparison.. Given the number of stocks in the overall market, it is very time consuming to calculate the P/E of the market.. The overall stock market index performance excludes the effect of dividends.. stock s P/E ratio can remain above or below market average for extended periods. [correct] Explanation: The P/E ratio of a stock does not automatically revert to the mean P/E ratio of the stock market. The P/E of the overall market is a broad measure by definition. The overall P/E of the stock market is widely calculated and available for investors. oth indices and single share prices typically do not account for the reinvestment of dividends. 157

Equities RELTIVE VLUTION 18% 6% 9% 67% 40. Here is a chart of the Nasdaq omposite, the world s main technology index. It peaked in the dotcom bubble on March 10, 2000. The P/E ratio later peaked above 500. In hindsight, this is widely agreed to have been a bubble. In March 2015, the index value for the first time since then surpassed the peak. Why might some investors at that point have argued this time it s different? 158

. Given low bond yields in the wake of the financial crisis, a 0.2% earnings yield on the Nasdaq now looks far more reasonable.. Given low bond yields in the wake of the financial crisis, a 0.6% earnings yield on the Nasdaq now looks far more reasonable.. Earnings grew substantially, meaning that the P/E ratio in early 2015 was only around 164.6x.. Earnings grew substantially, meaning that the P/E ratio in early 2015 was only around 30.3x. [correct] Explanation: See the blue earnings line on the chart. In 1999, it was close to the x-axis, and in 2015, it had multiplied in value. This was driven by many factors. For example, Google was one year old in 1999 and it listed in 2004. s of early 2015, it was the second largest stock in the Nasdaq and was profitable. In 1999, pple was early in its turnaround. s of early 2015, it was the biggest stock in the Nasdaq and the biggest stock on earth and had a mid-teen P/E ratio. lue went up, therefore green went down. The P/E ratio of the Nasdaq on the chart shown is 30.3x. 159

Equities RELTIVE VLUTION 9% 6% 6% 79% 41. The World Equity Index function show contains two valuation metrics for the S&P 500. The Nike description page contains the same two valuation metrics. How does Nike's valuation compare to that of the S&P 500?. Nike is less expensive than the S&P 500 on a P/E basis and more expensive on a dividend yield basis.. Nike is more expensive than the S&P 500 on a P/E basis and less expensive on a dividend yield basis.. Nike is less expensive than the S&P 500 on both a P/E and dividend yield basis.. Nike is more expensive than the S&P 500 on both a P/E and dividend yield basis. [correct] 160

Explanation: The higher the P/E ratio, the more expensive the stock. The lower the dividend yield, the more expensive the stock. This is because a dividend yield is the annual dividend divided by the share price, so if the share price is high in relation to the dividend, the dividend yield is low. Nike's P/E ratio is 27.6x and its dividend yield is 1.08%. Meanwhile, the S&P 500's P/E ratio is 19.2x and its dividend yield is 2.16%. 161

Equities RELTIVE VLUTION 18% 3% 12% 67% 42. If the earnings per share of a company is $1 and the earnings yield is 2%, what is the price per share?. $50.00 [correct]. $20.00. $200.00. $5.00 Explanation: Share price = earnings per share / earnings yield. This is because earnings yield = earnings per share / share price, so the two earnings per share expressions cancel each other out, leaving you with the share price. $1.00 / 0.02 = $50.00. 162

Equities RELTIVE VLUTION 18% 12% 15% 55% 43. This chart shows a scatterplot with the x-axis being the estimated sales growth and the y-axis being the estimated P/E multiple. Given this data alone, which of the following companies may warrant further analysis by a portfolio manager looking to buy an insurance company for her portfolio? 163

. Markel. llstate. Erie Indemnity. hubb [correct] Explanation: Portfolio managers are typically hunting for a bargain. While high sales growth is attractive, it will be weighed against the reasonableness of the multiple being paid for the shares. uying a rapidly growing company for a low multiple is the goal for many portfolio managers. In this case, the most rapidly growing company, hubb, has one of the lowest multiples of its peer group. It is growing more rapidly and on a lower multiple than the other three options. 164